The buyer is insisting on an asset sale to get a tax step-up, but the resulting double taxation will destroy our net proceed calculations. How do we structure a purchase price premium formula that automatically adjusts the final valuation to compensate us for the tax differential of an asset sale versus a stock sale?

Question

Tyler Smith · Accepted Answer

Buyers almost always push for an asset sale because it allows them to step up the tax basis of your assets and write off the depreciation, while avoiding your historical liabilities. For you, the seller, an asset sale can trigger massive double taxation if you are structured as a C-corporation, and heavy ordinary income tax rates on depreciation recapture. To protect your net proceeds, you must introduce a purchase price gross-up formula during the Letter of Intent stage. This formula calculates the exact tax liability of both a stock sale and an asset sale. It then requires the buyer to increase the purchase price of the asset sale to ensure your net, after-tax cash proceeds are identical to what you would have received in a stock sale. Do not wait until due diligence to bring this up. Present a clear tax-differential model compiled by your CPA during the initial negotiations. If the buyer wants the tax benefits of a step-up, they must pay for them. If they refuse to agree to a gross-up, you can use this as leverage to negotiate a stock sale backed by representations and warranties insurance to cover their liability concerns. This keeps your net proceeds intact and prevents tax friction from killing the deal.